House prices must fall ‘another 16%’ to become affordable

House prices must fall ‘another 16%’ to become affordable

Prices are still 15.9% below their 2021 peak, according to the Real Estate Institute.

But home prices averaged 10.7 times personal income, higher than at any time before 2020, Kiernan said.

The average house price was 6.7 times household income, compared to a long-term average of 4.5.

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The cost of debt repayment is 43.4% of the average household income, assuming a 20% personal contribution, a 25-year mortgage term, and a home with an average price and the lowest available mortgage rate.

To return to the long-term average of 34.4%, which takes into account a drop in interest rates to 5.9%, house prices would need to fall another 16%, he said.

“That decline would effectively bring prices back to roughly the levels of the second half of 2020, which was not that long ago.

“But to be clear: a further 16% drop in house prices would not make the housing market cheaper, but would only bring it closer to average affordability.

“To bring the relationship between house prices and incomes back into line with their long-term average, declines of 32% (based on household income) to 38% (based on personal income) are needed. Such declines are much harder to sell politically.”

Independent economist Cameron Bagrie said house prices did not need to fall to become more affordable. Photo / Alex Burton
Independent economist Cameron Bagrie said house prices did not need to fall to become more affordable. Photo / Alex Burton

But independent economist Cameron Bagrie said house prices did not need to fall to become more affordable: “I agree with the spirit of what (Bishop) meant, but perhaps not with what he actually said.”

He said it would be better for the economy if affordability improved, as incomes would rise faster than house prices.

A sustained decline in house prices would be worrying, he said, because of the impact on the broader economy and the banking system, which is heavily dependent on mortgage lending.

“Be careful what you wish for here.”

If house prices grew slowly for a decade and income growth lagged, that would result in an orderly return to affordability, he said.

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Miles Workman, senior economist at ANZ, said a sharp drop in prices would have a significant impact on confidence and prosperity, resulting in a hard landing for the wider economy.

He said it could also exacerbate the fundamental problem of New Zealand’s housing shortage.

“Any transition to affordable levels is likely to be much less destructive if it is driven by the supply side, where policies aimed at freeing up more land for development, intensifying housing construction and cutting red tape are important.

“Not all scenarios in which house prices fall in the short term will lead to better affordability in the longer term.

“The best cure for our affordability problem is a supply response. That’s not something the (Reserve Bank) can do much about by moving the (Official Cash Rate) up and down as the business cycle ebbs and flows. This is a problem that transcends the business cycle and is therefore something that local and central government need to address.”

According to Eric Crampton, chief economist at the NZ Initiative, part of the solution would lie in relaxing the spatial planning rules that are actually creating scarcity.

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“New Zealand’s house prices have been artificially inflated by zoning and consenting practices that have made it far too difficult to build new housing estates, new townhouses and new apartments. Relieving that artificial scarcity would make housing more affordable,” he said.

A zoning change could boost the value of some properties because it would allow people to build more homes on the land, he said.

“The value of other urban land could decline, if the scarcity of zoning that contributes to its value were to decrease. But the cost of housing would and should decline.”